The Eurozone Crisis

At the heart of the 2012 Eurozone crisis, Euro economies like Spain, Portugal, Italy and Greece built up a large debt because of too much risky lending and too much government borrowing. Most of these countries, in fact, had debts amounting to more than 100% of their GDP. Because these debts were so large, investors began to fear that Euro countries could not repay their debts so investor confidence fell dramatically. As a consequence, Euro economies faced higher borrowing costs, so their debt service increased and debts rose further.

The Eurozone was in a dire state and required funds to repay their debts, but they could not find any investors. Banks within the Eurozone required bailouts so there was a constant threat of bank runs. Moreover, investors did not want to invest in Euro economies so Euro governments could not sell bonds even with extremely high interest rates. All the Eurozone economies were suffering large debts at the same time so no single Eurozone economy would lend any further to another. Euro economies were forced to turn to austerity measures to start repaying their debts, but, such draconian measures in an already depressed economy would have been political suicide.

– Kenneth Rogoff referred to the Eurozone as the:

“ultimate contagion machine”.

One of the major problems was the Euro currency itself. Because all Euro economies share the same currency and there is only one central bank, it is easy to move money from risky economies to safe economies and leave risky economies with crippled finances. Spain, Portugal, Italy and Greece were in big trouble as money left their economies when they required more money to repay their debts. Ultimately, facing a deluge of financial problems, the Eurozone had to be bailed-out by the International Monetary Fund.